One option for financing a small business that’s often overlooked is the family office. Family offices operate as private companies that manage investments and trusts for a high-net-worth family or group of families. They’re typically very private and misunderstood, but if you unlock the secrets to how family offices invest in new ventures and the criteria they look for, it could be the key to funding your business.
What a family office is
Family offices are a particularly important source of capital for small-to-medium-sized businesses. According to the Family Office Club, there are currently more than 3,000 family offices in the U.S., and these offices, which generally have a minimum of $100 million in assets, often look at alternative investment opportunities — which could be your startup.
While family offices can be elusive and highly selective, referrals, trusted networks or entrepreneurship conferences may provide entry. The company seeking funding must also align with the family office’s investment criteria and philosophy. Many have a predisposition to invest in companies directly or indirectly related to the core business on which their success is built.
Ultimately, any new investor is betting on both the business plan and the founder/CEO. Conversely, the founder/CEO needs to find and identify a new investment partner who has a long-term view and the time and interest to help propel the business forward.
If you’re being introduced to a family office by a financial firm, there can be fees associated with the transaction. All investors will want to understand the exit strategy of the investment and clearly articulate that it’s important.
If a family office chooses to invest in your business, you may find that family offices:
- Provide incredible connections
- Are able to take advantage of a situation where markets may cease to function in a regular manner
- Are more patient than institutional investors or private equity
- Appreciate how much work has to go into starting a successful company
- Serve as mentors
When Morten Middelfart went searching for seed investors for Social Quant, his Twitter analytics company in Tampa, Florida, his banker suggested pitching Atlantic Merchant Capital Advisors, a local family office. One informal meeting with the private investment firm, which manages the wealth of individuals and their families, was all it took to land Middelfart’s venture a high-figure investment early in 2015, along with ongoing advice, customer introductions, and part-time office space.
Such experiences are rare, but they do happen, and more family wealth-management groups are betting on private equity deals. There are some drawbacks: Family offices can take longer to seal the deal than traditional angels and VCs, and they generally have a lower tolerance for startup failures, warns David McCombie III, founder and CEO of McCombie Group, a Miami-based private investment firm that has invested about $10 million in half a dozen startups in the past three years. But, he adds, many enjoy advising and supporting founders beyond simply writing a check. Plus, they have buckets of cash.
How to find a family office
So how do you go about finding a family investment office to back your business? Not all family offices are so named, making them tough to pinpoint via web or LinkedIn search. Some don’t even have a website. To broaden your search, McCombie recommends creating a wish list of wealthy people you’d love as backers and using LinkedIn to identify mutual contacts to introduce you.
Networking offline is equally important. “Get out into the community first. Get to know everybody,” says Mike Kawula, who joined Social Quant as CEO in April 2015. He credits that tactic with securing Social Quant’s funding. It’s best to let the investment community know who you are and what your company does before you go actively trolling for funding.
Once you’ve got some leads on family offices, call to ask whether they invest in early-stage companies, what startups their current portfolio includes, and what industries interest them. “The reality is, if you had a list of 100 family offices and personal contacts at each of them, only five or so would be legitimately interested in directly investing,” McCombie says.
Diego Villarreal, who raised $60,000 in seed capital from a family office for his nightlife app Banter!, warns that chasing after cold leads is a waste of time. “People say fundraising is a full-time job. But if you only go for the hot leads that might actually convert into investments, it’s not,” he says.
Cut to the chase by emailing an abbreviated version of your pitch deck to hot leads. It should be designed to grab their attention. “Three to four slides are plenty,” says Jeremy Office, founder of Maclendon Wealth Management, a multifamily wealth-management practice in Delray Beach, Florida, that caters to entrepreneurs. “The idea is to avoid overwhelming them and instead intrigue them enough so they want a follow-up meeting.”
If you get the meeting, let investors know you’re attracted to their experience or interest in your industry, McCombie advises. “Emphasize that you’re not just looking at them as another rich person,” says McCombie, “but you came to them specifically because you think they can add some value.”
In other words, show respect for the fact that these families constantly get tapped for capital, and they’ll be more likely to welcome you into their world.